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  Nicknamed the "crisis commodity," gold is an investment that people flock to when the world seems uncertain. And it’s no surprise— gold has been long associated with the gods, immortality, and wealth itself. In the midst of geopolitical and macroeconomic uncertainty, gold also provides portfolio stability. On the more recent historical record, gold has performed well in the worst of times, including the 2008 financial crisis and during the market fluctuations in the 1970s. This is in part because of the fact that, as the value of the dollar drops, the demand for gold tends to increase. Geopolitical and macroeconomic uncertainty seem to describe 2020 well enough. So, it’s no surprise that these days, the demand for gold and other precious metals is up.  But precious metals like gold are more than old forms of currency or components of jewelry. They are also used in car engines, dental work, our phones, as components of medical equipment and much more.  Here’s why you should consider adding precious metals to your portfolio.

What are precious metals?

Metals like gold were historically a form of currency but they also have industrial applications in dentistry and electronics. For example, gold is used in computer memory chips, electronic components for cell phones and other devices, dental filling including crowns and bridges, surgical instruments, medical treatments, telecommunication satellites, and specialized glass.  It might be surprising to learn that while China, Australia and Russia are the world’s major producers of gold, the U.S. is the fourth-largest gold-producing nation. In 2019, the U.S. produced 6.1% of the world’s total gold production for the year coming from states including Nevada, Alaska, Colorado, California, and Arizona.  While gold is the best-known precious metal for investment, it isn’t the only one. Investors should also consider silver,platinum, and palladium.  Like gold, silver has historically functioned as currency. Unlike gold, however, silver tends to play a stronger role as an industrial metal. Whereas only about 10% of the demand for gold is driven by industrial use, about 60% of the annual demand for silver is driven by industrial use. That said, the gold market is larger than that of the silver market. Silver today is used in batteries, solar panels, cell phones and other electronic devices, nuclear rods, antifreeze, ointments, mirrors, specialized glass, engine bearings, water filtration systems, dental fillings, as well as for silver inputs to industrial items including electrical appliances and medical products.  Platinum, another precious metal, is even more rare than gold, which often drives its prices higher than that of gold. An industrial metal, platinum is most notably used for automotive catalysts. Catalytic converters are exhaust emission control devices that minimize pollutants, and they are in growing demand. The automotive industry is the world’s largest consumer of platinum.  Palladium is an even lesser-known precious metal but it is found in Russia and South Africa, as well as in the U.S. and Canada. Palladium is approximately 30 times as rare as gold. In such high demand that exceeds supply, palladium, like platinum, has exceeded the price of gold in recent years. Palladium is used for a variety of things, from catalytic converters (like platinum) to dentistry, medicine, chemical applications, jewelry, and groundwater treatment.  Increasingly stricter environmental laws and pollution restrictions mean that manufacturers are required to increase the amount of palladium in catalytic converters. 

Why invest in precious metals?

Precious metals offer investors much-needed diversification. Because precious metals aren’t very closely correlated with stocks, bonds, or real estate, they help buffer portfolios in times of uncertainty. For this reason, some advisors suggest putting 5 to even 10% of an investor’s portfolio with precious metals, depending on their circumstances and goals.  The performance of precious metals in today’s unpredictable market isn’t disappointing. In August 2020, the price of gold hit an all-time high, up more than 36% from the start of 2020. While it hasn’t held that all-time value, its jump demonstrates that gold is a relatively safe bet when the markets are in flux. While buying bullion might seem like an obvious and safe bet (the investor owns physical gold or silver), it’s not for every investor. It requires a safe storage site, for example, with investors often choosing to keep their valuables at a bank, which can be costly. It also often entails the seller taking a cut on the sale. Unlike the markets for gold and silver, the market for palladium is small, with only a handful of companies that offer exposure to palladium. And while treasure chests are great, precious metals (especially in the cases of platinum and palladium) have practical applications that drive their demand.  Investing in precious metals isn’t an end-all, be-all answer, but it is a path for diversification that many investors choose, especially with the world in flux. [/vc_column_text]

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